Dorman Products, Inc. — Q1 2017 Form 10-Q
Reporting period: Thirteen weeks ended April 1, 2017; comparison is the thirteen weeks ended March 26, 2016. Dorman supplies replacement parts and fasteners, primarily to the North American automotive aftermarket.
Financial highlights
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $221.6 million | $208.1 million | Up 6% |
| Gross profit / margin | $88.7 million / 40.0% | $80.6 million / 38.7% | Margin up 1.3 percentage points |
| Operating income / margin | $45.0 million / 20.3% | $38.9 million / 18.7% | Higher |
| Net income | $29.2 million | $24.7 million | Up 18% |
| Diluted EPS | $0.85 | $0.71 | Up 20% |
| Operating cash flow | $38.1 million | $23.9 million | Higher |
Gross margin improved primarily from a more favorable mix toward higher-margin products and cost leverage on increased volume. SG&A rose to $43.7 million from $41.7 million, reflecting higher variable costs and wage and benefit increases; the prior-year period included a $0.9 million doubtful-account provision related to a customer bankruptcy. The effective tax rate declined to 35.3% from 36.5%, partly due to stock-compensation tax benefits.
Cash, liquidity and capital
- Cash was $156.3 million at April 1, 2017, versus $149.1 million at December 31, 2016. Working capital was $453.6 million; shareholders’ equity was $620.0 million.
- No borrowings were outstanding under the $30 million revolving credit facility. After $0.8 million of letters of credit, approximately $29.2 million was available. The facility was due to expire in June 2017; the company reported covenant compliance.
- Investing activities used $18.7 million, including $5.6 million of property and equipment additions, $3.1 million for the Ingalls Engineering asset acquisition, and $10.0 million for a minority investment in a supplier. Financing activities used $12.2 million, including $11.0 million of share repurchases.
- The company sold $146.0 million of receivables through customer-sponsored programs during the quarter, compared with $135.2 million a year earlier, incurring $2.5 million of financing costs in each period. Without receivable sales, an additional $370.6 million of receivables would have been outstanding at quarter-end.
Material developments, outlook and risks
- Sales growth reflected increased product demand, including new products. On January 6, 2017, Dorman acquired certain assets of Ingalls Engineering, a chassis and suspension business, for approximately $4.8 million, including $3.1 million cash and estimated contingent payments of $1.7 million tied to future sales.
- Management said available capital should meet cash needs for at least the next 12 months. No specific revenue or earnings guidance was provided. Results can fluctuate with customer order timing and new-product introductions.
- Management expects continued customer pressure on margins, pricing, product returns and payment terms as the customer base consolidates. Extended terms may increase working-capital needs or receivables-sale costs; further extensions are expected.
- Other cited risks include competition, economic conditions, customer and vendor concentration, product quality and development, foreign currency and sourcing costs, legal claims, cyber-attacks, and changes to receivables-sale arrangements. A 1-percentage-point increase in LIBOR or receivables-program discount rates was estimated to raise annual interest and financing costs by approximately $3.7 million, assuming balances remained constant.
- Adoption of ASU 2016-09 produced a $0.8 million tax benefit in the quarter; future benefits may vary. Management said current legal matters were not expected to have a material financial impact. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Investor facts to verify
- Whether the revolving credit facility was renewed or replaced before its June 2017 expiry.
- How customer payment-term extensions and receivables-sale costs affect cash conversion, liquidity and margins.
- Whether sales growth and gross-margin improvement persist, particularly as product mix and new-product demand change.
- The final valuation and contingent payments for Ingalls Engineering, and the performance of the acquired business and supplier investment.
- Potential effects of customer concentration, ongoing tax examinations and unrecognized tax benefits of $4.1 million.